Top Law Schools

Intro

The conventional wisdom on this site and the rest of the internetz is that federal loans are always the better choice, and the Grad PLUS loan is better than a private loan for financing law school. However, this could not be the case for a considerable number of people ITE if you've used credit responsibly.

Specifically, for future law students with good credit and a reasonable chance at a high-paying job come graduation, the low prime rate, which is likely to remain historically low for many more years, means that a private loan can be the financially prudent choice.

Test
Let's put this to the test and look at what Wells Fargo is offering.

Wells Fargo GraduateSM Loan Interest Rates
Prime, Plus: | APR While in School and During Grace | APR in Repayment
1.50% 4.59% 4.75%
3.00% 5.97% 6.25%
4.00% 6.88% 7.25%
5.00% 7.77% 8.25%
http://wfefs.wellsfargo.com/jump/rates.html

The prime rate has a floor of 3.25%, which is where it sits now and where it will likely be for at least the rest of the year. That means even if your credit qualifies you for the worst tier above (5%), you’re still accumulating interest at a rate lower than the Grad Plus while in school (7.77% vs. 8.5%) this year. Now, the reason this ends up a bad deal in the long run for the borrower in that. If the prime rate goes up to where it was as recently as 2007, which is 8%, then the 13% interest rate doesn’t look so good. Take the Grad Plus!

But look at what happens if you qualify for the first tier (1.5%). During this school year (assuming the prime rate stays low through the fall and next spring) your interest rate is only 4.59%.

That is 3.91% lower than the Grad Plus rate, which this year alone will save you $1500 on a $40,000 loan.

Importantly, the prime rate won’t stay low forever.
http://www.moneycafe.com/library/primeratehistory.htm

Let’s make a few fair assumptions here, for the sake of argument since you’ve made it this far. The U.S. economy is growing slowly, and it will continue to do so. To stimulate growth, the FED will do what it has historically done (for better or for worse) and it will keep rates really low for the next 3-5 years, and then it will slowly raise them. Let’s try to account for this while also looking at the previous 15 year historical resistance in the graph above: Between 1995 and 2010, the prime rate never rose above 9.5% (the dot com bubble).

So now I’m really putting my forecasting hat on: For the next 15 years, until at least 2025, the prime rate will rise and fall between 3.25 and 9.5%, and thus we can conservatively assume that 6.5% will be the average prime rate for the 15 years after the Class of 2013 graduates. Let’s apply these predictions to the hypothetical student again:

It’s now 2L year, and the prime rate has crept up to 4.5% for a student who has borrowed $80,000 in student loans. That means the private loan interest rate has gone up to 5.84%, still 2.66% less than the Grad Plus. That’s $2100 in savings your second year.

3L: Primate rate- 5.5%; Loan interest- 6.84%; Interest savings vs. Grad Plus- 1.66%; Savings on a $120,000 loan- Another $2000.

So you’ve graduated and saved $5,600 so far, and you want to pay off your loans in 15 years (reasonable enough right?). The prime rate averages 6.5% between now and that goal post, and subsequently your private loan interest rate is 8%. That’s 0.5% below the Grad Plus. You’ve got $135,000 in loans to pay off, since interest has been accumulating while in school. (Hey, it could have been $140,600).

With Wells Fargo Graduate Loan:
Loan Balance: $135,000.00
Adjusted Loan Balance: $135,000.00
Loan Interest Rate: 8.00%
Loan Fees: 0.00%
Loan Term: 15 years
Minimum Payment: $50.00

Monthly Loan Payment: $1,290.13
Number of Payments: 180

Cumulative Payments: $232,223.51
Total Interest Paid: $97,223.51

Grad Plus Loan:
Loan Balance: $140,600.00
Adjusted Loan Balance: $140,600.00
Loan Interest Rate: 8.50%
Loan Fees: 0.00%
Loan Term: 15 years
Minimum Payment: $50.00

Monthly Loan Payment: $1,384.54
Number of Payments: 181

Cumulative Payments: $249,218.59
Total Interest Paid: $108,618.59


http://www.finaid.org/calculators/scrip ... yments.cgi


The private loan saved you $17,000 by comparison with the Grad Plus option.

Conclusion:

Even someone who buys everything I just wrote, and who has good credit, can still find reasons to take the Grad Plus. Here are two:
1) That $17,000 difference can be regarded as an insurance premium you’ve paid all throughout your repayment period, to hedge against the chance that there’s a sequel to the 1980’s classic film “PRIME RATES gone WILD” (see history of prime rate cited above).
2) The Grad PLUS loan allows for income based repayment
http://www.finaid.org/loans/ibr.phtml

Let’s say you didn’t land that $160k job after graduation (hey, maybe you’re more interested in saving the world, fair enough), and you make $50,000/year. Based on the Grad Plus income based calculation, your monthly payment can be capped at $402. After 25 years, your debt will be forgiven.

In summary, there is probably only a small subset of people who are better off taking a private loan. Those people a) secure the best interest rate , b) have faith that the prime rate will not be skyrocketing in the next 15 years, and c) plan on earning a high salary.

For me personally, I’m not confident enough in my economic prediction, or my ability to secure a high paying job, in or order to not be willing to hedge with the Grad Plus. But it was fun thinking this through, and I haven't ruled the private loan out just yet.

What do you think?

Edit: 07-08-10
Looks like I incorectly assumed that the Grad Plus loan was fixed at 8.5% for this post, when in fact it's fixed at 7.9%. Personally, I'll be taking out Grad Plus loans.

That's a huge gamble, and I don't like gambling with 100k+ that I don't have.

Plus, IBR.

I spoke with a representative at Wells Fargo about this loan a few weeks back. He believes the prime rate, which has been at their floor for a year, will likely go up substantially in the next five years. He also advised that unless you have perfect credit, getting the lowest rate is highly unlikely. Even people with very good credit probably won't have a chance in this lending environment. Lastly, the guy actually said he would recommend taking the 8.5% fixed, every time, even if one had very good credit.

Not to mention that the private loans don't usually offer deferment or forbearance benefits, so if you lose your job you're kind of screwed, whereas you can ask to put a Federal loan in forbearance while you're out of work.

If you aren't making 160k, your LRAP will probably help you out if interest rates skyrocket. All you lose by going private is the IBR and other federal programs. And read the federal requirements carefully, do you really want to be paying back loans when you are 50-55 years old? (albeit with inflated dollars?)

I'd favor a combination of fixed and floating rate loans to fund Law School- and Staffords (20,500 a year) are already fixed rate, at a lower rate than Grad Plus.

And don't forget the Grad Plus fees, which are up front and pretty hefty.

The reall message that is unsaid here, is that students should spend their UG years establishihng a pristine credit record so they DO qualify for the lowest provate rates. it's not that hard- requiring only the judicious use of a few credit cards over 4 years.

Hmm so you suggest Stafford then private lenders, like Wells Fargo, over Grad Plus?

This is like reasoning out your odds of a market salary job from a TTT. Sure you can say it makes sense on paper, but if a bunch of shit doesn't break your way, well...



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Fuck it then.

interesting thread....anyone else care to add to the private vs federal loan options?

You can't beat IBR-go with the federal loans.

I mean, I don't know who in their right mind would crap on an insurance policy like IBR. You're basically taking like a 150k + gamble to save like half a point in interest.......

hithere wrote:You can't beat IBR-go with the federal loans.

What's IBR?

There's a middle path you didn't consider: take federal loans, refinance with private loans once the big money job is in the bag. This means you pay slightly more during school, but get the "insurance" of federal flexability, then you stop paying the premium over private loans once you are confident you don't need that "insurance" anymore.

Your plan seems like a great way to ruin yourself financially.

rad law wrote:Your plan seems like a great way to ruin yourself financially.

can you elaborate please?

I'm in law school because I can't do math...

clint4law wrote:

rad law wrote:Your plan seems like a great way to ruin yourself financially.

can you elaborate please?

Bacally for the reasons OP mentioned above. At sticker, I wouldn't want to be subject to the vagueries of the interest rate, especially if I didn't land biglaw fresh out. Plus, with IBR and loan forgiveness after 10 or 25 years, you have a worst case scenario option, even if it's not very good. Plus, as a 22 year old who's had a credit card for about 3 months, there's no way I can secure a good interest rate anyways unless I convince my folks to co-sign.

IBR

/thread

chicagolaw2013 wrote:IBR

/thread

fucking translation please

cmutone wrote:

chicagolaw2013 wrote:IBR

/thread

fucking translation please

do you haz google?

IBR = income based repayment program offered on federal loans. Think of it as failure-at-life insurance.

It's an interesting idea. The problem is every step of the way you insert another assumption that may or may not come true. Government loans are the safer, smarter option for 99% of law school grads. The one real exception is students who have significant family resources, in the entirely possible event the worse case scenario happens.

Private student loan term 20 years and Grade Plus loan term 10 years if you borrow $20000 total. I survey the market of various types of loans and I analyze that in next 15 years the interest rates will be between 0.5% to 9.85%.

..

I think private loans can certainly be a good choice. You have to weigh the potential payoff with the risks, which are (1) that interest rates will go up, and (2) that for some reason your high paying job won't work out and you want to use IBR.

YCrevolution wrote:

paybill wrote:Private student loan term 20 years and Grade Plus loan term 10 years if you borrow $20000 total. I survey the market of various types of loans and I analyze that in next 15 years the interest rates will be between 0.5% to 9.85%.

I analyze differently. Regardless, I don't think any of us are in the position to accurately predict future interest rates. Historically, over the past few decades, PRIME was around 12%.

Reasons for private loan:
-you can't get a Grad Plus loan (foreign student, more than 90 days in default on personal debt and no co-signer who qualifies)
-currently lower interest rates and sometimes "bonuses" for graduating/grades/etc.
-you're a libertarian/Republican/etc. and hate government so much that you're willing to cut off your nose to spite your face

Reasons not to get a private loan:
-deferment and forbearance is often not available
-like gov't loans, they are not really dischargeable short of extreme circumstances (you die, are permanently and totally disabled, etc.)
-PRIME is at a historic low, and 15%+ interest in the future is well within the realm of possibility
-depending on the loan terms, private lenders can accelerate your payments if you miss a payment (or even make it all due at that point)
-no qualification for federal loan forgiveness, either through IBR or federal employment (some federal agencies have loan repayment benefits)
-if you have no/not-good credit history, you may not be able to secure an amount equal to your COA
-if you have a family, the remaining balance on your federal loans is forgiven upon your death... for private lenders, they'll have a claim against your estate, leaving less money for your family/heirs.

Not sure where you get the idea that prime rates average 12%. If you look at the graph at the link below prime rates have rarely stayed at rates in this realm for long, so basing your expectations off of 12% doesn't seem like a smart thing to do.

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If you have some financial flexibility and good credit I think that private loans can be a good option. Depending on the size of your debt and your other assets you may even be able to refinance your variable rate loans into fixed rate loans should the tenor of the market change substantially. Looking at the current treasury yield curves this doesn't look particularly likely.